What is the state of the financial markets today? What are the principles to be observed when investing intelligently? Here is what emerged from J.P. Morgan’s latest report
What should an investor know today to be called ‘smart’? Last week, the S&P 500, the world’s largest stock market index of America’s 500 most capitalised companies, reached a new all-time high, its 46th of this year.
However, although major asset prices tend to be bullish in the long run, steering the markets is still a complicated business. Here are two principles an intelligent investor should know today.
The state of the market
First, however, it may be useful to analyse the state of the stock market. Results in 2024 were decidedly positive because most listed companies exceeded growth expectations. More than three-quarters of the companies exceeded expectations by 6.8% in aggregate. However, a few exceptions came from what many believe to be the most promising sector soon: artificial intelligence. For example, ASML, a leading Dutch semiconductor supply chain company, put pressure on chip stocks on Tuesday after missing earnings and revising its sales forecast 2025.
On the other hand, regarding the bond source, US government bond yields fluctuated throughout last week, then stabilised after releasing two important macroeconomic data: retail sales and unemployment benefit claims. Consequently, the current situation makes us cautiously optimistic about the FOMC meeting on 7 November 2024, after the committee still needs to meet in October. Will the FED and its chairman Jerome Powell cut interest rates again, as happened in September?
How can we not mention the US elections, scheduled for Tuesday, November 5? It is certainly important to follow what will happen, but it is not fundamental, as we will see by analysing two cardinal principles of the intelligent investor that we have extrapolated from the latest J.P. Morgan report.
Smart investing: the hygiene of your portfolio
The first crucial principle for J.P. Morgan to invest intelligently is portfolio hygiene. This term indicates the identification of clear objectives and the creation and maintenance of a long-term plan, all accompanied by regular ‘check-ups’. What does this mean from a practical point of view?
To understand this, we can extrapolate an example from the current market situation. Last week, we celebrated the second birthday of the current bull market, at least as far as the stock market is concerned. On 12 October 2022, the S&P 500 touched a low at 3,577 and has since recorded +60%. Although very positive for investors, this upward movement has certainly unbalanced the allocations of those who diversify between different types of assets, e.g., stocks and bonds. Therefore, if one’s strategy provides for it, it may be time to rebalance and stick to one’s plan.
For example, if we look at a 60/40 type portfolio (60% invested in stocks of the S&P 500 and 40% in US bonds), we see that it has had a total return of about 27% over the past year. Without rebalancing, the same portfolio would now be overweighted in stocks at 64% and underweighted in bonds at 36%, given the difference in return between the two asset classes. According to J.P. Morgan, a smart investor periodically takes the time to analyse their financial situation and make adjustments according to their strategy.
However, the preceding is not mandatory. If your strategy involves periodic investments, perhaps through recurring purchases, but does not involve periodic rebalancing, you can safely proceed without changing allocations. Consider extending your current approach to another innovative and promising market: cryptocurrencies.
Understand the risks, but prepare for the opportunities
The second principle of the ‘smart’ investor identified by J.P. Morgan ties in with what was specified at the end of the previous paragraph. In a market often influenced in the short term by macroeconomic and political news and events, it is important to look to the long-term and sound fundamentals.
Some topics that we have often discussed on our blog, such as the upcoming US presidential election, geopolitical turmoil in the Middle East and monetary policy decisions by central banks, may cause unease or arouse fear. However, they mustn’t affect one’s long-term strategy in any way. In the investment world and when trading in the markets, it is crucial to focus on knowledge, data, and tangible and concrete variables rather than unknowns.
In support of this thesis, J.P. Morgan presents some historical data, which shows that markets tend to rise regardless of the winner (or winner) of presidential elections. The same argument can also be applied to conflicts and central banks’ decisions on interest rates. Since 1950, there have been 18 elections in the US and ten changes in the White House between Democrats and Republicans. Over these 74 years, US GDP growth has averaged 3.2% per year, while that of the S&P 500 has averaged 9.4%. In short, an investor, if intelligent, should take the ball when he starts to doubt his investment strategy due to news or unexpected events and use the moment to re-examine his objectives, plan, and the time horizon of his investments.
In conclusion, according to J.P. Morgan, an intelligent investor does not change his strategy depending on the news or looming events. On the contrary, he constantly monitors the situation but only acts according to his plan and objectives.
Related Article
Download the Young Platform app
